Kansas City Southern (NYSE:KSU) saw some pickup in its coal-hauling business in the third quarter, but wasn’t exactly saying during an Oct. 19 earnings call that coal burn by its power plant customers is returning to anything like normal.
At the end of the second quarter, KCS said that utility coal volumes had bottomed in the spring and had recovered to what it saw were sustainable levels in June and July. “So far that has proven to be the case,” said Executive Vice President and COO Dave Ebbrecht during the Oct. 19 earnings call. “And even though whole revenue was slightly lower than last year, it grew by more than 40% over the second quarter. There are a couple of wild cards out there that could cause November and December comps to be more challenging, including the fact that we began shipping to a new customer in November of 2011.”
During the third quarter, strong growth and record revenues in crude oil and frac sand more than offset the declines in utility coal and petroleum coke, Ebbrecht added. The KCS guidance for its energy segment continues to be negative for the full year in spite of really exceptional growth in frac sand and crude oil, but continued weakness in the utility coal space.
“I think it’s really remarkable to produce the revenue and volume results that we just announced in the quarter were coal and grain which represents 20% of our business, were both weak,” Ebbrecht said in his opening statement. “I am sure we will get our fair share of coal questions, so I will just say that our visibility into the future is at best cloudy. We will give our 2013 nominations from our customers around December 1st so we should have a better feel for the outlook in a few weeks.”
Pat Ottensmeyer, KCS Executive Vice President, Sales & Marketing, was asked about any closures of coal-fired power plants in 2013 that the railroad serves. “We only have nine plants on our network and we ought to be able to do a better job of forecasting but there are just so many factors that has changed the landscape,” he said. “I don’t think Texas can really operate with plant closures on a long term basis, but in any given quarter with natural gas prices being where they are, we could see shutdowns like we did in the spring of this year, where we saw significant shutdowns of capacity. So it’s just a real hard thing for us to get visibility on. As I said our crystal ball is very cloudy, there are a couple of big events that are going to happen here in the next few weeks that will hopefully give us better clarity, including our customers giving us the nominations in 2013 around December 1st.”
Ottensmeyer was also asked about the impacts on the served coal plants of natural gas prices rising lately, easing coal-to-gas switching by power generators. “It looks a whole lot better than it did 90 days ago, so I think we said as we look at our coal plants, our business is pretty simple, we serve nine plants and we have the opportunity to serve a 10th in 2015,” he added. “We have put a red flag on those plants where either natural gas prices or EPA regulations [make them] questionable and that could be as much as 30% of our coal business. Do we think that we are going to lose 25% to 30% of our coal business? Absolutely not. There is a lot of politics involved in this. Some of the customers are digging in and saying, we are not going to invest in the scrubbers, we are going to close the plants and that means that we are going to lose jobs and the markets that we serve, particularly Texas, just are going to need the power and so those plants are going to produce at some level.”
He added: “With gas prices kind of where they are now in the mid $3 [mmBtu] range, most of our plants tell us that they can compete and they can operate profitably at this level, but some of them are not in that position. So it’s like a fire-hose; the analogy I use here internally is like a fire-hose with the water flow blasting and no one holding onto it, in terms of the forecast that we are hearing and the possible range of outcomes going forward. And again as I realize it’s not a very satisfying answer for you guys, it’s not a very satisfying position for us. It’s just very hard for us to forecast.”
David Starling, KCS President and CEO, added: “[I]f you look at the one of these plants in Texas, they burn today a lot of lignite and that lignite is not as clean as the Powder River Basin coal. One of the outcomes out of this is that they could be restricted from burning lignite and they’ve got to switch to Powder River Basin coal. In that instance, we would actually gain coal share and the market would go up from what we previously had.”
Headquartered in Kansas City, Mo., Kansas City Southern is a transportation holding company that has railroad investments in the U.S., Mexico and Panama. Its primary U.S. holding is The Kansas City Southern Railway Co., serving the central and south central U.S.
The KCS website shows that the railroad’s coal plant customers include the Flint Creek plant in Arkansas of American Electric Power (NYSE: AEP), the Shady Point plant in Oklahoma of AES Corp. (NYSE: AES), the Asbury plant in Missouri of Empire District Electric and the Monticello and Martin Lake plants in Texas of Luminant Energy.